Microsoft Windows revenues in rare slip

By Richard Waters in San Francisco

Microsoft’s Windows operating system suffered a rare slip in revenues in the opening months of this year, stirring renewed unease about the state of the PC market in the face of competition from the iPad and other tablet computers.

Despite a stronger than expected bounce in earnings, the latest quarter also saw Microsoft’s profits fall below those of Apple for the first time in more than two decades, according to figures released late on Thursday.

IN Technology

The news sent Microsoft’s shares down 2 per cent in after-hours trading in spite of robust demand for the company’s Office software and a jump in sales of video game hardware.

The biggest software company saw an unexpectedly large 41 per cent increase in its direct costs.

That ate into its traditionally fat gross profit margins, which fell by 5 percentage points, to 76 per cent.

Peter Klein, chief financial officer, put the sharp rise in expenses down to stronger sales of the Xbox console and the Kinect game controller, which carry bigger costs, as well as an unexpected shortfall in search advertising following the integration of the Microsoft and Yahoo advertising systems.

The two companies are to delay the international roll-out of their search advertising alliance until they have worked out how to boost revenue per search in the US and Canada to the levels they had hoped for, he added.

Wall Street had become more hopeful about the state of the PC market – and Microsoft’s prospects – following a surprisingly robust earnings report from Intel this month. However, the software company said its revenues from Windows fell 4 per cent in the three months to the end of March, the third quarter of its fiscal year.

It said the decline was in line with the fall in global PC sales this year that had already been reported by two technology research firms. Commenting on the apparent discrepancy with Intel, Mr Klein said the chipmaker had benefited from one-off factors such as a build-up in inventory and higher average selling prices, and claimed that the underlying trends seen by both companies had been the same.

Overall, Microsoft reported revenues of $16.43bn for the three months to the end of March, up 13 per cent from a year before and ahead of the $16.19bn Wall Street had expected.

Strong sales of Office, which pushed up revenues for Microsoft’s business division by 21 per cent, and demand for the Kinect game controller, which drove up sales in the entertainment and devices division by 60 per cent, led the way.

Microsoft’s earnings also beat analysts’ forecasts, thanks largely to a fall in the company’s tax rate. Net income climbed by 31 per cent to $5.23bn.

Earnings per share reached 61 cents, up from 45 cents the year before and ahead of the 56 cents Wall Street had been expecting.